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P&C Insurers Face a Softening Market

Property and casualty insurers saw slower growth in underwriting gains and paid less of that growth out in claims in the first quarter, suggesting the industry may be softening after a profitable four-year run.

According to a quarterly analysis by Ratings, the industry reported a 2.7% increase in underwriting gains in the first quarter to $8.9 billion, from $8.7 billion in the first quarter of 2006. This year-over-year growth has slowed dramatically from double-digit growth in the previous five years.

The industry also reported a loss ratio -- the percentage of each premium dollar received that is paid out in claims and claims-related expenses -- of 64.7%, the lowest in more than 14 years. Its combined loss ratio -- claims plus claims-related expenses as a percentage of each premium -- came in at 91.1%.

With the property and casualty insurance market softening across all lines of business, it will be a challenge for insurers to sustain such attractive results in an increasingly competitive market. Insurers are forced to lower prices while taking on more risk, benefiting consumers through more stable -- or lower -- premium rates and better, easier-to-obtain coverage.

Insurers, conversely, will likely have to take on more risk by providing insurance they may have otherwise rejected or charged a higher premium. The insurers are apt to take on that risk in order to gain the premium and invest it for potential investment gains.

How It Works

Everything from dog-bite liability to medical malpractice to business interruption to homeowners coverage is included in the broad sector of property and casualty insurance. The common denominator in these and the more than 30 other lines of property and casualty business is the need to mitigate risk. Anyone from the individual homeowner to the multinational corporation who is at risk for loss turns to a property and casualty insurer to transfer that risk.

Historically, property and casualty companies run their core business -- underwriting -- at a loss. In other words, the amount they pay out in claims is higher than the premiums they bring in. Underwriting losses have typically been the name of the game for the industry for decades.

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